At its July meeting, the Federal Open Market Committee (FOMC) voted to hold the Federal funds rate steady in a range of 4.25% to 4.50%. With tariff impacts on inflation still developing and the economy holding up, most of the Committee favored leaving rates unchanged. However, for the first time in over 30 years, two members (Michelle Bowman and Christopher Waller) dissented, voting for a 25bps rate cut. Chair Powell hinted that Bowman and Waller would release a statement describing the reasons for their dissents in the coming days.

The statement language was little changed. Tweaks were made to reflect recent economic developments, but stopped short of teeing up the Fed’s next move, allowing the Committee to maintain its optionality:

• Nodding to the slowdown in real final sales to domestic purchasers in 1H25, the updated statement acknowledged that economic activity “moderated in the first half of the year.” Previous language noted that it “continued to expand at a solid pace.”

• The Fed said that economic uncertainty “remains elevated”, removing language that uncertainty “has diminished”. During the press conference, Chair Powell clarified that this was meant to communicate that uncertainty has not diminished since the Fed’s last meeting. This was interesting in light of the string of recent trade deals.

During the press conference, Chair Powell parried away questions about federal government policy and recent interactions with the President, instead underscoring the importance of Fed independence.  Powell believes that the current monetary policy stance is modestly, but appropriately, restrictive, and gave little indication that should change. He confirmed that the Fed will continue to set policy based on how far each mandate is from target. On recent economic data, he described the labor market as in balance, citing that declining labor supply has allowed the unemployment rate to remain low despite weaker labor demand. Moreover, he noted that inflation remains above target, even excluding tariff impacts. Neither of these statements signal that the Fed is ready to continue easing policy just yet.

Market expectations turned progressively more hawkish during the press conference, with the likelihood of a September cut falling from 63% to 49%. In our view, there is little reason for the Federal Reserve to cut rates in September. Unemployment remains low at 4.1%, while payroll employment continues to grow, albeit more modestly in recent months. Moreover, with tariff policy still unfolding and its inflationary impacts just beginning to materialize, the Committee will likely prefer to wait for clarity on the duration, magnitude, and breadth of these price pressures before shifting policy. That said, the FOMC will have two more Jobs reports and CPI reports in hand ahead of its September meeting. To prompt a September cut, a sharp rise in the unemployment rate without a material rise in inflation appears necessary.

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